Cryptocurrency Taxes: US and EU Perspectives

After getting through all the technicalities of cryptocurrency and understanding how to trade it off and profit from it, you’re now probably wondering how to actually spend it. You’re thinking whether all the profit you’ve amassed is really yours and can be spent however you want. Well, it is yours. Except, of course, for the portion of your gains that will have to be paid for taxes.

Yes, like any acquired asset or profit, cryptocurrency is also subject to tax. With little difficulty, a Bitcoin holder can calculate or have at least a rough estimate of how much tax is needed to be paid. Tax rates, of course, vary from country to country.

Cryptocurrency Taxes in the USA

The Internal Revenue Service (IRS) has already issued a statement on the taxation of cryptocurrency. According to IRS, as long as the virtual currency can be converted to cash, then it shall be deemed taxable following the capital gains rules. But because of the erratic nature of cryptocurrency, with its value reaching outstanding peaks and then sudden drops, calculating the gains and losses can seem confusing, and strenuous at the least.

With the capital gains rule, what’s important is the value of the virtual currency at the time you acquired it, and during the time you’ve disposed of it, or sold it. Say you bought a bitcoin when its value was $2,000, and during the same year, it has gone up to $8,000 then down to $1,800, and finally climbing back up to $3,500 – that’s when you realize that you want to sell it already.

For tax purposes, the only figures that matter here are the $2,000 you’ve invested at the beginning and the $3,500 you’ve managed to acquire from selling your bitcoin. Subtract your initial investment of $2,000 from your selling value of $3,500, then the difference of $1,500 is your capital gain, which is the amount that’s taxable. Whatever happens in between is irrelevant when it comes to tax dues.

What if you don’t sell your bitcoin and instead use it for online transactions like payments and purchases? Even if you don’t cash out your bitcoin, but still treat it like cash and use it to pay for your online shopping, you would still be taxed for these payments. It’s the same with trading it off for other virtual currencies. If you trade your bitcoin for some ethereum, then you’ve made a transaction which still involved value for these currencies, which in turn makes the transaction subject to tax.

Whether you sell your bitcoin, trade it off, or use it for online purchases or payments, under the US Federal laws, these transactions would make you subject to cryptocurrency tax payments.

European Taxes on Cryptocurrency

In 2014, the United Kingdom has repealed its Value Added Tax imposed on cryptocurrency as they considered it to be “assets” and not actual currency. This means the capital gains rule now applies to virtual currencies.

Given the tax-free allowance of £11,300 per person, a British citizen can cash-out his bitcoin under that value every year without having to pay any tax at all. So, if you wish to quietly liquidate your bitcoin, then you’re gonna have to do it £11,300 at a time – unless you’re married, then your tax allowance would be doubled and you could cash-out £22,600 tax-free. And that’s on a single year alone.

The Dutch have a different perspective on virtual currencies for they consider them as “barter items” instead of legal currencies that need to be subjected to various regulations and licensing. Thus, those dependent on cryptocurrency are being taxed based on the basic income tax rates alone.

Germany’s cryptocurrency tax law is pretty much the same with the UK, in which there is no Value Added Tax and that they also provide a tax-free allowance in the amount of €800. A German Bitcoin investor would be subjected to capital gains rule the moment he exceeds the tax-free allowance, wherein he would be required to pay 25% flat rate. Other than that, no additional tax is being asked by the German government.

Italy, on the other hand, refused to impose any tax on any cryptocurrency yet. So if you’re an Italian Bitcoin player, then it’s still a good time to continue investing in virtual currencies while the government has still yet to decide on how to approach the cryptocurrency taxation.

Indeed, several governments have yet to fully comprehend the effect and value of the cryptocurrency market on their tax income. Some are merely adopting other government’s attempt to impose a seemingly reasonable tax amount, owing to the erratic nature of the cryptocurrency and the fact that 10 years after its birth, there are still a lot of factors and loopholes protecting the virtual currency from succumbing to any form of authority.